Russia’s Currency Strategy and Oil Revenues in Focus
Bloomberg reports that Moscow may keep buying foreign currency for its reserves in May. The Bloomberg analysis suggests that rising oil revenues are helping stabilize public finances, which could prompt the Ministry of Finance to resume foreign exchange purchases as soon as this week.
The initial outlay is projected to be about 200 million dollars worth of yuan each month. The Chinese currency remains the primary asset Moscow can use to conduct operations for the National Welfare Fund, which is currently valued around 154 billion dollars.
Bloomberg notes that Russia has scaled back yuan sales used to cover the budget deficit over the past two months, with April’s sales roughly halving February levels. Analysts say that a pivot back to buying foreign currency would signal Moscow’s intent to preserve oil revenue flows despite sanctions and the price ceiling imposed by G7 economies on oil and related products.
Even with continued military spending and an ongoing large deficit, the budget is gradually recovering, helped in part by changes to how some oil taxes are calculated, according to Bloomberg.
Implications for the Ruble
Natalia Milchakova, a leading analyst at Freedom Holding, highlights that it matters for the market that the state avoids repeatedly drawing down and spending reserves. She suggests the move could have a positive effect on the ruble. In a separate Bloomberg interview, economist Alexander Isakov described the expected foreign currency purchases as initially small but symbolic, meant to show that the country is building rather than depleting its reserves.
Whether Moscow continues with currency buys depends on several variables, including ruble volatility and oil production levels. Bloomberg estimates place the probability of resuming currency purchases at around 65 percent for May and about 80 percent for June.
Currency Transactions Overview
Earlier in the year, the Central Bank of Russia restarted foreign exchange operations under the amended budget rule after nearly a year of disruption. The rule directs that currency purchases align with higher estimated oil and gas revenues and sales align with lower revenue estimates. In a shift from prior practice, transactions are now conducted using the Chinese yuan rather than Western currencies. At the start of 2023, the Ministry of Finance increased yuan sales as Russian oil prices fell. By early April, the agency announced a near 40 percent reduction in yuan sales under the budget rule. The shifts reflect a broader approach to managing reserves and exchange rate risk amid external pressures.